Neos S&P 500(R) High Income ETF (BATS: SPYI) is an interesting play on the S&P 500 benchmarked to the CBOE’s S&P 500 Buy-Write index. The Buy-Write index tracks potential returns from an S&P 500-oriented covered call strategy, which is the SPYI’s primary focus. It is an actively managed fund utilizing proprietary techniques to pinpoint and profit from options activity, including long and short positions. Because the strategy is buy-focused, the fund is also positioned to increase in value in rising markets, as in 2024. The SPYI is up 5% YTD in early December, but the capital appreciation isn’t why you own this stock.
Neos S&P 500(R) High Income ETF is an income-focused asset with a high monthly yield. The annualized return is nearly 12% in 2024 and is sustainable because buy-write or covered call positions generate monthly cash flow. The monthly payment tends to be erratic, but it trends in a tight range near $0.50, providing a reliable cash flow. However, there is a catch. The buy-write strategy means profits aren’t taxed like typical corporate earnings, and distributions are classified as return of capital or ROC, not ordinary dividends. ROC has different implications depending on portfolio strategy, risk tolerance, and investor needs and may not be suitable for all.
SPYI: A Concentrated Portfolio Brings Risk
The SPYI holdings align with the S&P 500 with the top ten names in similar allotments, accounting for roughly 35% of the portfolio. The concentration introduces elevated risk into the portfolio, setting it up for a leveraged decline should the underlying index retreat. It is worse for any investor who also owns the S&P 500 or its top constituents.
Net asset value, or NAV, is important for SPYI and any actively managed fund. The NAV is the fund's value after liability and can be used, along with the stock price, to gauge its success, risk, and outlook. Rising or falling, the NAV can give lots of insight, including the risk associated with the manager or an expectation for sharp share price changes. Actively managed funds can trade at a discount or premium to their NAV; in this case, it is a premium. The premium implies that the manager brings value to the portfolio but is slim, less than 50 basis points.
Does SPYI beat the market? The answer is no. The ETF is just two years old, so there isn’t much data available. Even so, it has lagged behind its index at every point measured—over one month, six months, year-to-date, one year, and since it launched. With this factor in play, the reasons to buy it versus the S&P 500 are limited and centered on the cash flow. While unsuitable for some investors, ROC is well-suited for investors in higher tax brackets, retirees, or anyone needing to manage cash flow and taxes. The structure allows for regular distributions, higher-than-average yields, and distribution returns to whittle down the investment cost basis, deferring taxes to later years while reducing the tax base.
SPYI’s Cash Flow Comes at a Cost
Investors looking to enter the SPYI should be aware of negative factors, including increased price volatility and low liquidity. The ETF price is trending higher but tends to jump around, gap up and down, and can make outsized movements on a day-to-day basis. One of the reasons is the options strategy, and another is the ETF volume. The ETF volume is trending higher but slowly, and the daily average is still below one million shares, indicating an illiquid market that will be hard to exit when the broad market turns against it.
Despite the risks, institutions are buying SPYI in 2024. The institutional activity has been robustly bullish for more than four quarters, with the trailing twelve-month data indicating 99% buying and only 1% selling. MarketBeat tracks 78 firms that own shares, and their activity has ramped up sequentially, hitting a record high in Q4, including Stifel Financial Corp. and Rockefeller Capital Management.
